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Longevity insurance

The birth rate worldwide has been steadily declining over the past few decades against the background of increasing life expectancy: the aging of the population has become global. According to the UN, in 2018, for the first time in human history, the number of people aged 65 and over exceeded the number of children under five years old, and by 2050, every sixth person in the world will be over 65, compared with every eleventh in 2019. Developed countries have long faced the problem of aging population and retirement benefits for the elderly. The problem is being solved in the United States as follows:
Longevity insurance

In world practice, there are two classical types of pension systems based on the principle of financing: pay-as-you-go and funded. In the pay-as-you-go pension system, payments to pensioners are made at the expense of the current income of workers (current tax revenues to the budget). In the funded system, the working generation pays contributions that are not spent on payments to the elderly but accumulated, invested and, together with the investment return, subsequently used to provide pensions to those who have been saving.

We can particularly highlight the notional-defined contribution pension system used in some countries, it combines elements of the pay-as-you-go and funded types of pension systems. Pension entitlement is earned by the participant's contributions to the pension system. At some point, prospective retirees enter into a deferred retirement annuity contract with a life insurance company.

“A deferred insurance annuity is an insurance agreement under which the insured person receives regular payments from a certain moment in the future. The term for these payments can be established by the contract, otherwise payments are made during the life of the insured person. Such contracts are usually concluded with the aim of maintaining income levels after the end of employment. The insurance company assumes the risk of longevity, that is, if a person lives longer than the average life, his income in total may exceed the amount that can be obtained from other investments. At the same time, if a person dies earlier than average, he or she loses some of the income. Thus, long-livers receive more income from contracts of customers with a shorter lifespan. The corresponding additional income of centenarians is called mortality credit,” explains ACRA.

This type of insurance is common in the United States. In general, all able-bodied US citizens can independently form their pension. There is a 401 (k) plan, a special account to which the employer transfers funds. This allows the employee to transfer a percentage of the salary to a tax-free account. More precisely, the tax is postponed until the time of retirement. The Americans save on taxes this way while making savings for the future. 401 (k) payments are usually 6% of pre-tax salary.

SIMPLE IRA is the second most popular pension plan. It is also called the IRA Employee Incentive Savings Account. Such a plan is most often offered by small private companies: the employer pays 1% -3% of the salary before taxes.

SEP IRA is a type of retirement insurance for self-employed people. The main distinguishing feature of IRA SEP is its high contribution limits. You can deposit up to 25% of your gross annual salary or 20% into your retirement account.

Social Security is a federal financial assistance program for the US residents and their dependent family members.

The US Treasury completed the creation of requirements for deferred life retirement annuity contracts or QLACs in the summer of 2014. This document provides an exception to taxation rules and additional requirements for insurers. For example, a person can pay $20,000 from their retirement savings at age 60 to purchase longevity insurance, which will receive $11,803 a year from age 85 until death. In this example, we can see that if a person lives to be 95, he will receive $118,030 for his $20,000. This is a rate of return that far exceeds the available profit from market rates.

The economic reason for high returns with low risk is that policyholders waive any claims for the initial investment. If a person dies before age 85 (the maximum age until which QLAC funds can be deferred), the insurance company pays nothing to his heirs and is not liable for his obligations to creditors.

Another reason for the high profitability is the rather long investment period, due to the delay in payment, which allows the insurance company to use less conservative investment policies. Besides, this retirement plan keeps the life insurance company’s client in the lower tax category, which results in good cost savings with a high investment return.

Many people buy such an annuity because it allows them to have financial protection in old age for a fairly small amount. Another benefit of QLAC is that it allows spouses create a joint deferred annuity.

Photos are from open sources.

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